Remote Work Is Here to Stay.
Cities and Property Markets Will Never Be the Same.
Looks like we’ll be working from home for a while longer. A lot longer. We’ve learned a lot in the last two years about working remotely and adapted our homes to be functional workplaces. Plus, our employers have upgraded their infrastructure to facilitate remote working, often shedding space in the process.
And perhaps most importantly, we also now better understand both the advantages and difficulties of working from home (WFH). For many more of us than before the pandemic, the benefits are just too compelling to want to go back to the old ways.
But not everyone. Though the extent of remote working is often inflated in dubious surveys by firms with a vested interest in hyping WFH, less than half of American workers are able to work remotely, according to the most reliable government data.
Many occupations don’t lend themselves to remote work, such as service jobs requiring personal contact, like nurses, physical therapists, and bartenders. That also includes any job requiring specialized equipment or requiring multiple workers to collaborate on a physical project, whether on a factory floor, in a lab, or at a restaurant. And many people either don’t want to or can’t WFH. They may value the social interaction of an office or factory floor. Or their home doesn’t provide the quiet, physical space, or freedom from distractions needed to work productively.
Nonetheless, tens of millions of Americans can and do work remotely, at least some of the workweek, and their numbers swelled significantly during the pandemic. And their impacts are even greater than their share of the population because so many of them are highly compensated knowledge workers.
I wrote about this WFH trend last year in Emerging Trends in Real Estate, published annually by the Urban Land Institute (ULI) and PwC. There was much debate then about the permanence of WFH arrangements. In what may have been wishful thinking by commercial building owners, many believed that firms and their employees alike would tire of the isolation and sweatpants and that most everyone would soon return to their company workplaces.
Less Office Space in our Futures . . . and Related Services
But now we know more, and the odds are even higher that remote work isn’t going away, at least not to the way it was. A revised study released by the Federal Reserve Bank of Dallas concludes that the share of people permanently working from home either some or all the time going forward maybe 50% higher than before the pandemic. The biggest gains are for higher-income and highly educated workers. In other words, the workers most likely to work in downtown offices.
If the study’s survey results bear out, “this would mean that almost half of all workers with a bachelor’s degree or more would WFH at least partially, and almost 15% would not commute to their jobs at all.” That’s huge, and the hit to office buildings would be enormous. Yes, it really does seem like major employers are finally ready to reopen, restoring much economic activity in downtowns. But that won’t shift the underlying trend toward much higher levels of remote working than prevailed before COVID-19 upended work patterns.
The amount of space demanded will not decline in lockstep with the drop in daily workplace occupancy. Companies need extra space for remote workers to collaborate in person, if only occasionally. But under almost any conceivable scenario, employers will be leasing less space per worker in the future than previously. And even with continued employment growth, tenants will be occupying less space overall, meaning we’ll need fewer office buildings in our downtowns going forward.
Maybe you don’t own a skyscraper and wonder why you care about the fortunes of office building owners? To start, there’s the impact on all the other services that depend on office workers actually sitting in office buildings: the coffee shops and restaurants that provide meals to the workers; the
FedEx offices and couriers that provide essential business services to the office tenants; the hotels that board business travelers visiting nearby companies. The pandemic office closures have decimated all of these businesses and many others. Permanently fewer office workers mean less support for these businesses. Little wonder, then, that downtowns have been so eerily quiet in many cities.
But the impacts are much broader than just the damage to commercial real estate markets and local businesses and their workers. Here are three other significant trends I see for urban places that may be less obvious and don’t get nearly enough attention: the devastation of public transit, a game-changing break in the traditional link between work and workplace, and hope for more affordable housing in expensive gateway cities.
Public Transit Diminished and Depleted
Perhaps the most adverse impact of changing work patterns is the enormous decline in public transit usage, with consequences that extend far beyond transit riders. Transit agencies around the country report shocking falls in ridership and farebox revenues, especially from the wealthy professionals whose fares many agencies count on to subsidize service levels elsewhere in the system. With lower fare revenue, agencies cannot maintain their fleets or must cut service, particularly to more far-flung neighborhoods. With greater levels of remote working becoming an enduring fixture of work-life, especially for white-collar professionals, many transit agencies face permanent revenue reductions and service cuts.
In truth, transit ridership had been falling for years before the pandemic. Still, the growth in remote working (and commuters’ fears of contracting the Covid virus on public transit) has sharply accelerated the decline. In some metros, the fallout is severe enough that transit agencies might need a bailout or restructuring.
What does this mean? Most directly, reduced service makes commuting much more difficult for many workers, particularly residents of lower-income communities that depend most on mass transit. These service reductions magnify the so-called geographic jobs/worker mismatch: workers who can’t get to where the jobs are located. Thus, otherwise qualified workers can’t find work or must settle for inferior jobs with an easier commute. Meanwhile, firms seeking to hire workers must settle for less-qualified candidates or simply leave the position open.
One unexpected outcome of remote working: more traffic. Many metros report auto traffic levels back above pre-pandemic levels. How can this be when fewer people are commuting to work? Two reasons. First, with transit service and ridership down, more commuters travel by car. And more people are driving alone to avoid exposure to the virus, increasing the number of vehicles on the road.
Second, people are traveling different routes than they used to. Road systems typically are designed to move traffic to and from the central city, not between suburban communities. With more people staying close to home, the roads get clogged with these inter-suburban trips.
Geographic Liberation Increases Suburban and Sunbelt Migration
The commute to work has long defined where households are willing to live. With the rise in remote working, the link between work and workplace is vanishing along with the division between workplace and residence, giving workers more freedom to choose where and how to live. That’s another absolutely profound change since the pandemic.
Most remote workers — even most remote office workers — commute into a company workplace at least a few days a week or month in a “hybrid” work arrangement. When you need to come into an office at least sometimes, you’ll generally want to reside within some reasonable commuting distance; almost certainly, you’ll remain in the same metro as your workplace. But you might be willing to live further away than when you commuted in every day.
That opens up a lot more residential options. Though the press exaggerated the exodus of residents from downtowns during the pandemic — which was generally limited to a small set of high-profile cities like New York and San Francisco and was mostly temporary, in any case — many workers have migrated out of denser city neighborhoods and into more suburban and even rural communities. Home prices are surging across the nation but are growing fastest in the suburbs. “Zoom towns” on the urban fringe have seen the greatest growth of all.
And then there are those “untethered” workers who rarely, if ever, go to a physical workplace. For them, the options are almost unlimited. Many are choosing to move to entirely different regions, especially in more affordable Sunbelt metros, reinforcing migration trends that predate the pandemic.
Relatively few workers have this luxury. But those that do tend to be very highly-paid professionals, and their collective impact on some hot destination cities like Austin and Boise can be overwhelming. Tensions rise as old-time residents are priced out of neighborhoods, with newcomers bidding up home values that still seem like a bargain compared to where they came from. Such is the price of “success.”
More Affordable Housing in the Priciest Markets
Will this migration spell the demise of the coastal gateway cities? Hardly. America’s great cities have all cycled through many chapters and emerged the better for it. OK, not always better, which is inherently subjective, but different and vital.
But there’s no doubt that the thinning ranks of downtown workers is taking a steep economic toll. Tourism is down. Business is down. Too many small businesses and organizations that make cities interesting — the restaurants, theatres, mom & pop stores, galleries, and dive bars — have shuttered, along with their distinct micro-communities.
Yet there is one big upside for these cities: the potential for improved housing affordability. After a decade in which housing construction consistently job growth in the years leading up to the pandemic recession, many of our signature cities had become pricey enclaves out of financial reach to all but the wealthiest households. The result was a distressing decline in ethnic and income diversity. Cultural and entertainment amenities also suffered — the very attractions that make cities unique and attract the monied residents in the first place — as artists, musicians, cooks, and poets could no longer afford to live there, or even within practical commuting distance.
How might the decline in office building occupancy help reverse this regrettable slide? Simple supply and demand. (Yes, I’m an economist.) On the supply side, vacant office buildings can be repurposed into apartments. Such conversions can be challenging, not least because commercial and residential buildings typically have much different layouts. The floorplates on commercial buildings are generally deeper and provide less interior light than needed for residential construction. But creative architects and engineers can fashion solutions such as adding lightwells to the floorplates and skylights to apartment units to bring new life to these old structures.
These approaches often are not financially feasible on older obsolete buildings, however, so these could be candidates for demolition for new construction. Despite the lamentable losses for building owners, this redevelopment potential points up the other side of the coin: the decline in property values allows for more affordable housing construction. And, on the demand side, fewer affluent professionals will be competing for the scarce available housing, so prices should moderate.
Indeed, this is happening already: Rents and housing prices have been appreciating more slowly in the gateway cities than in the new boomtown markets. Continued outmigration from expensive cities could ease prices further. With greater affordability comes the potential to attract those previously priced out of the market and restore more diversity.
Meanwhile, cities have been busy during the pandemic making physical changes to enhance livability: the expansion of outdoor dining, the birth of “slow streets” that prioritize pedestrians over vehicles, the “parklets” that occupy former parking spaces. Combined with more affordable housing, that’s an excellent foundation for moving forward out of the pandemic.
Remote working certainly creates problems for big employment cities and their leadership. But the most dynamic and innovative cities will leverage the opportunities to create a new, more inclusive, and diverse future.
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